Liquidity Crisis
An increasing number of companies are struggling to procure cash. In particular, a lot of construction and shipping companies’ corporate bonds are scheduled to mature in January and February, increasing the possibility of another Tong Yang crisis. Although the government will provide some support for those vulnerable companies, they are hesitating, worried about a labeling effect. Economists are pointing out that the risk in the vulnerable sector could further affect the capital market in the wake of the Tong Yang Group scandal.
According to Samsung Securities and other industry sources, a total of 41.2 trillion won (US$38.5 billion) worth of corporate bonds mature this year, which is approximately 2.5 trillion won (US$2.3 billion) larger than the previous year.
The sum amounts to 19.255 trillion won (US$18.0227 billion) for the top 30 conglomerates alone. Among them, those with a higher ranking and a sounder financial structure are expected to have little difficulty in issuing new corporate bonds. However, the others could face a liquidity crisis due to the instability in the debenture market.
Data from the Financial Supervisory Service shows that the amount of corporate bonds issued in November last year was 3.3678 trillion won (US$3.1523 billion), 1.7064 trillion won (US$1.5972 billion) less than in October. 88.4% of the bonds were AA grade. In the meantime, according to NH Nonghyup Securities, the outstanding ratio of the bonds with an A or lower grade issued between January and November 2013 amounted to 56.6%.
“The year of 2014 will be very tough for the corporate bond market,” said Hyundai Securities analyst Min Dong-won, adding, “The credit spread is likely to go up, due to the rise in the interest rate of government bonds and lots of bonds mature this year, which means the supply and demand situation is far from favorable.” Another concern is that the government’s measures for the stabilization of the market are not working as desired.
As stated above, the labeling effect is the biggest reason why the companies are unwilling to apply for the measures. When an applicant will benefit from conversion issue assistance, it has to sign a credit transaction MOU with its main creditor bank and be subject to restructuring by means of the disposal of assets and subsidiaries.